In a bid to shore up the capital base of public-sector banks (PSBs) struggling with massive stressed assets, the government is considering a proposal to provide as much as Rs 25,000 crore for infusing capital into PSBs this fiscal, against the budgeted Rs 10,000 crore, an official source told FE. “A proposal to allocate the same amount of funds for capitalisation as in 2016-17 is under consideration. But a final decision is yet to be made,” said the source. as part of its Indradhanush plan, the government is supposed to provide Rs 70,000 crore over a four-year period through 2018-19 (Rs 25,000 crore in each of the first two years and Rs 10,000 crore in each of the last two years) for the recapitalisation of PSBs.
Analysts had termed the budgetary allocation of Rs 10,000 crore for recapitalisation in 2017-18 too low, considering that PSBs are struggling with massive bad loans. While the government has agreed to offer more support, in keeping with the latest policy, any such capital infusion will be tied to strict conditions, including effective non-performing asset (NPA) management, sale of non-core assets, further closing of loss-making branches and temporary trimming of employee benefits, if required. According to latest data, as many as 13 of the top 16 PSBs have gross NPAs of above 10%, while two of them (Central Bank and UCO Bank) just about manage the mandatory 9% capital adequacy norm. In a recent report, global rating agency Fitch said that India’s PSBs will need capital infusion of $65 billion to meet all of global Basel III banking rules by March 2019. “…state banks, which account for 95% of the estimated shortage, have limited options to raise the capital they still require”, the agency said. Such state-run banks are likely to rely on the government to meet core capital requirements, it added.
According to the Fitch, the government is committed to investing only another $3 billion in fresh equity for 21 state banks over FY18 and FY19, having already provided most of the originally budgeted $11 billion. It says while the government has budgeted for $3 billion (Rs 20,000 crore) over two years through 2018-19, it will have to pump in more than double, even on a bare minimum basis, if it is to raise loan growth, address weak provision cover, and aid in effective non-performing loan or bad loan resolution. The gross bad loans ratio reached 9.7% in FY17 from 7.8% in FY16, it said. Banks need capital primarily to cater for the credit requirements of borrowers as well as to set aside funds to tackle bad loans. Although credit growth has been muted in recent years, the rise of stressed assets has raised PSBs’ provisioning requirements, making capital infusion by the government so important. While announcing Indradhanush in August 2015, Centre had estimated PSBs’ total capital requirement of about Rs 1,80,000 crore over a four-year period through 2018-19. It then proposed to provide Rs 70,000 crore of budgetary support out of the total requirement; the rest — Rs 1,10,000 crore — were to be raised by the PSBs from the market.